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BANKRUPTCY

For most consumers, there are two kinds of bankruptcy – Chapter 7 and Chapter 13. There is also Chapter 11 bankruptcy, but Chapter 11 is much more expensive and complex, and not often used by consumers.

For businesses, there is Chapter 11 bankruptcy. Businesses cannot use Chapter 7 or 13.

There are also special bankruptcy chapters for farmers, fishermen, and others, but these are less frequently used.

What is Chapter 7 bankruptcy?
Chapter 7 is a way to wipe out most debts and start fresh. It is usually used by persons who don’t plan to try to keep their home. Credit card debts, mortgages, lines of credit, medical bills, and many other similar kinds of bills can be wiped out. It usually takes about 4 months from start to finish.

There is a test to qualify for Chapter 7, called the “means test.” If you earn more than the means test amount, you probably cannot go to Chapter 7. The means test numbers are adjusted from time to time, but to give you an idea, as of the end of the year 2009, a family of 4 needed to make less than $79,477.00 to qualify.

Important note: Some kinds of debts cannot be wiped out. (See below.)

What is Chapter 13 bankruptcy?
Chapter 13 is a way to keep your home and possibly pay some of your debts over 3 or 5 years.

Chapter 13 can stop foreclosure of a home. You must make payments on a plan approved by the court. Almost all of your surplus income beyond your living expenses goes to your creditors for 3 or 5 years. Chapter 13 is more complex than Chapter 7. It is not finished for 3 or 5 years.

You must be able to make monthly payments on your payment plan for 3 years or 5 years in order to be approved for Chapter 13.

There is a test to qualify for Chapter 13. You must have secured debts (such as mortgages) of less than $1,010,655, and unsecured debts (such as credit cards) of less than $336,900.

A secured debt is a debt that has a security some object like a house or car. An unsecured debt is a debt where no specific object was offered to guarantee the debt, like a credit card or a medical bill.

What is Chapter 11 bankruptcy?
Chapter 11 is usually used by businesses, not for individuals. However, if individuals do not qualify for Chapter 7 (because income is too high) or Chapter 13 (because debts are too high), they may qualify for Chapter 11. Chapter 11 is similar to Chapter 13 in some ways – there is a payment plan over 3 or 5 years. But Chapter 13 is much more expensive and complex than either Chapter 7 or Chapter 13. This web site is oriented to Chapter 7 and Chapter 13. If you do not qualify for either, we can discuss Chapter 11.

Can I wipe out all types of debts in bankruptcy?
No. Some kinds of debts can never be wiped out: child support, spousal support, debts from drunken driving damages, debts arising from fraud, and a certain others. Some kinds of debts usually cannot be wiped out, but in a few instances can be wiped out: most secured debts, many kinds of taxes, and student loans.

The good news is that many of the most common kinds of consumer debts can be wiped out: credit cards, mortgages, lines of credit, personal loans from friends and relatives, and medical bills.


FAQ BANKRUPTCY

Is bankruptcy for everyone?
No. Bankruptcy is one option to deal with your debts. Another option is to try to negotiate with your creditors to get new payment terms or to reduce your balance. Creditors will sometimes agree to take less, but they often want it in one lump sum. Many people don’t have the money in one lump sum to pay it. Also, you may be “judgment proof,” meaning that creditors cannot collect against you because you don’t have any assets or because the assets you do have cannot be reached by creditors.

Bankruptcy damages your credit. But if your credit is already in poor shape, and creditors will not leave you alone, calling and calling, or have garnished your wages or put a lien on your house or your bank account, bankruptcy may be the best choice. Bankruptcy can help you deal with all these matters.
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Can I wipe out all debts in bankruptcy?
No. Some kinds of debts can never be wiped out: child support, spousal support, debts from drunk driving damages, debts arising from fraud, recent taxes, and a few others. Other kinds of debts usually cannot be wiped out, but in a few instances can be wiped out: most secured debts, many kinds of taxes, and student loans. On the other hand, many of the most common kinds of consumer debts can be wiped out: credit cards, mortgages, lines of credit, and medical bills.
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How does bankruptcy stop creditors?
Once you file for bankruptcy, creditors must stop trying to contact you or collect against you. This is called the “automatic stay.” However, creditors can file a motion to ask the bankruptcy judge to permit them to keep trying to collect a debt or foreclose a house. This is called “motion to lift the automatic stay.”

Also, some kinds of proceedings can go forward no matter what, such as paternity actions, child support and alimony actions, wage garnishments, domestic violence cases, criminal matters, and utilities company claims.
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Can bankruptcy stop a home foreclosure?
Chapter 13 can stop a foreclosure. But you will need to be able to make all your normal monthly payments, and also pay whatever past-due payments you have not paid. For example, suppose your monthly payment is $3,000, and you have not paid for a year. That is 12 months x $3,000 = $36,000. If your Chapter 13 Plan is for 3 years (36 months), you must pay $36,000 divided by 36 months = $1,000 per month in addition to your normal monthly payment.

Chapter 7 will stop a foreclosure for a short period, usually about 2 months. But if you are behind on your house payments, the bank will usually make a motion to the bankruptcy judge to “lift the automatic stay” and let them continue the foreclosure. The judge usually approves these motions, especially if you are planning to give up the house anyway.
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How will bankruptcy affect my credit? How long does bankruptcy stay on my credit report? How long does it take to rebuild my credit after bankrtupcy?
Bankruptcy damages your credit. It stays on your credit report for 10 years.

Rebuilding your credit is not a legal issue, but an issue in the hands of the 3 private credit agencies (Experian, Equifax, and Transunion). In general, it appears that it can take from 2 to 4 years to rebuilt your credit. You do have a legal right to insist that the 3 credit agencies keep only accurate information on your report. If the 3 credit agencies report a debt as still outstanding that was discharged in bankruptcy, you can insist that they correct the information.

You have a right to see your credit report once per year for free from each of the three private credit agencies. See www.annualcreditreport.com.

Note that credit cards companies are likely to cancel your cards once you file for bankruptcy.
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Do I have to give up everything I own in bankruptcy?
No. The bankruptcy system allows you certain minimums to continue living and working. Under Chapter 7, for example, you can keep a car, clothes, a TV, a computer, a stereo, tools of your trade, and similar items, as long as they are not worth more than a certain amount of money (usually not very much).

Under Chapter 13, you are allowed to keep your property as long as you are paying on your Plan for 3 or 5 years.
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I am married. Should I file together with my spouse or separately?
This is a complex decision, with many rules, and every case is different. If you have bad credit and your spouse has good credit, for example, this might be a reason for you to file separately without your spouse. If you have separate debts from before the marriage, this might be another reason to file separately. But if your spouse’s income is much higher than yours, and you are trying to wipe out community debts of the marriage (joint debts you got while married), the Court could suspect you are engaging in fraud.

Also note that federal law defines marriage for bankruptcy purposes, so same-sex marriages will not be recognized for bankruptcy filing.
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What if I have filed for bankruptcy before?
You cannot get a second Chapter 7 discharge of debts within 8 years of filing a Chapter 7 case.

You cannot get a Chapter 7 discharge of debts within 6 years of filing a Chapter 13 case. (There are a few exceptions.)

You cannot file a Chapter 7 if a previous Chapter 7 or 13 case was dismissed in the past 180 days because you violated a court order or you requested a dismissal after a creditor asked for relief from the automatic stay (such as to foreclose on a home).

You cannot get a Chapter 13 discharge if you already got a Chapter 13 discharge in the past 2 years or a Chapter 7 discharge in the past 4 years. You can still file the case, but you cannot discharge debts until the deadline passes.
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Can I file bankruptcy if I have not filed my taxes?
The courts have not clarified whether you must be current on your tax filings to be able to file Chapter 7. But the bankruptcy trustees usually insist that you be current. If this is an issue, discuss it with the attorney.

You must be current on your tax filings in order to be able to file Chapter 13. You must also stay current during the life of your payment plan (3 or 5 years).
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Can I do a loan modification on my home or another property while in bankruptcy?
In Chapter 7, the promissory note for your home loan is going to be wiped out. Therefore, the only way to modify the promissory note (the loan) in Chapter 7 is to “reaffirm” the debt. That means that the debt is not wiped out by the bankruptcy. Therefore, you must think very hard about whether you want to keep the house, because there is no guarantee that a modification will be approved by the bank.

In Chapter 13, you may be able to negotiate a home loan modification, provided the bank is willing. You cannot force the bank to do it, however. We have helped clients successfully modify their home loan while in a Chapter 13. This is generally a complex process, and there are no guarantees. With respect to properties other than your home, a modification may be possible with or without the bank’s consent.

Also, in Chapter 13, if you have a second loan on your home, but there is no equity in the house to support the second loan (that is, the house is worth even less than the first loan), you may be able to “strip” the second loan and pay little or none of it.
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I already started a loan modification on my home or another property before filing for bankruptcy. How will filing for bankruptcy affect it?

In Chapter 7, the promissory note is going to be wiped out, so there will be no loan to modify. Therefore, the only way to go forward is to reaffirm the debt, which is a complex decision. Reaffirming the debt means not wiping it out.

An already-begun loan modification process is more likely to find success in Chapter 13. But again, there are no guarantees. It depends on the bank.
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Can bankruptcy affect my employment?
In most instances, the law prohibits government employers and private employers from taking action against you in your present job or contracting based solely on the fact that you have gone to bankruptcy. However, government units (including the U.S. military) can take a bankruptcy into account when making decisions about promotions and the like. This area is complex. If you are concerned about it, we should discuss the details.
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Can I pick and choose which debts to list in bankruptcy?
No. You must honestly disclose to the Court all your income and debts without exception. If the Court finds that you have been dishonest in your bankruptcy filings, your case could be dismissed, and you could be subject to other penalties.
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How complex is the process?
We conduct an interview with you and analyze your entire situation to be sure that bankruptcy is right for you. If so, you must bring us a number of financial documents, and a large number of forms must be filled out. The forms are filed, and you are given a hearing date (the “creditors’ hearing”) for about 45 days later. If it is a Chapter 13, you will also have a second hearing called a “Plan confirmation hearing” about 60 days after filing. Assuming all goes well, that is all. If it is a Chapter 7, your case will close about 60 days after the creditors’ hearing. If it is a Chapter 13, you will make your first plan payment within 30 days of filing, and continue to pay each month for 3 or 5 years.
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Can I file under one Chapter and convert to another Chapter later?
Yes, in most cases. If you start out in Chapter 13 and find that the payments are too much to handle, you can covert to Chapter 7. But if your goal was to save your house in Chapter 13, you will probably lose it if you do this. Sometimes you can convert voluntarily, and in some instances you must get the judge’s permission.
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